exploding myths in property & investing - recm...exploding myths in property & investing...

RE·CM is a licensed Financial Services Provider, FSP number 18834

RE·CM is a licensed Financial Services Provider, FSP number 18834

February 2013

Exploding myths in property & investing

RE·CM is a licensed Financial Services Provider, FSP number 18834

Agenda

1. Exploding Myths in Property – John Rainier

2. Exploding Myths in Investing – Linda Eedes

3. Q & A session

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RE·CM is a licensed Financial Services Provider, FSP number 18834

RE·CM is a licensed Financial Services Provider, FSP number 18834

John Rainier FOLLOW US ON TWITTER

@RECM_Online

RE·CM is a licensed Financial Services Provider, FSP number 18834

Discussion points

Yields Relative to Long Bonds Current price Current values and implied earnings growth Exploding some other myths Value in some offshore markets

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Long bonds minus property yields

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Current values

SAPY Price premium to NAV – +30% Long Bonds more expensive than ever before in period and

relative yields moving up SAPY DY – 6,0% ALSI EY – 6,6% Implies, everything else being equal, SAPY grows earnings into

perpetuity (at 0,6% pa) faster than the ALSI (Note the implied growth differential has become less extreme over the past 6 months)

Source I-Net Bridge and RE:CM Analyst 5

RE·CM is a licensed Financial Services Provider, FSP number 18834

Historically Listed Property (PUT) has grown earnings at 6%pa (-4%pa real or 60% of inflation)

Over same period ALSI has grown earnings at 14,5% pa (+4,5pa real)

So ALSI has grown earnings at 8,5% pa faster than listed property

How realistic then is the current pricing model?

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But…

RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Conclusion

On historical basis listed property should be priced at a discount to the EY of ALSI, not premium

SA Listed property is very expensive Probably only underpinned by “chase for yield” but cannot be

sustainable

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Exploding some other myths

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Property distributions only go up

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RE·CM is a licensed Financial Services Provider, FSP number 18834

The price only goes up

11 Source: I-Net Bridge

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Pocket of value offshore

We don’t hate property, just overvalued property We value property just as we value all investments Bottom up approach

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

IGD Portfolio

Italy 51 Investments in 11 regions

19 shopping malls and retail park 19 hypermarkets and supermarkets 1 city centre 4 plots of land for development 1 property held for trading 7 other

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RE·CM is a licensed Financial Services Provider, FSP number 18834

IGD Portfolio continued

Romanian 13 medium sized cities

15 Shopping Centres 1 office building

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RE·CM is a licensed Financial Services Provider, FSP number 18834

RE·CM is a licensed Financial Services Provider, FSP number 18834

Linda Eedes FOLLOW US ON TWITTER

@RECM_Online

RE·CM is a licensed Financial Services Provider, FSP number 18834

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Myth 1: The Great Wall of China is the only man-made structure visible from space.

RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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Not visible.

RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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Myth 2: Cracking your knuckles gives you arthritis

RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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Yes.

RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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No.

RE·CM is a licensed Financial Services Provider, FSP number 18834

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Myth 3: People only use 10% of their brain

RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

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100%

IMP

OR

TAN

T

RE·CM is a licensed Financial Services Provider, FSP number 18834

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Myth: forecasting is essential as a starting point

Source: Inet

Forecast Interest

Rates

Forecast Economic Growth

Forecast Sectors that will do well

Forecast Earnings for

Stocks in Sector

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RE·CM is a licensed Financial Services Provider, FSP number 18834

The professionals can’t forecast for toffee

Source: Federal Reserve Bank of Philadelphia 47

RE·CM is a licensed Financial Services Provider, FSP number 18834

Myth: good GDP growth = good equity returns

Source: Dimson, Marsh, Staunton ,Credit Suisse 48

RE·CM is a licensed Financial Services Provider, FSP number 18834

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20

25

30

35

40

45CARREFOUR (U$)

CARREFOUR (U$)

Myth: poor economic prospects = poor investment

Source: Datastream, Time Magazine

Up 70% since then!

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Myth: near-term uncertainty = bad outcomes

Source: The Economist 50

RE·CM is a licensed Financial Services Provider, FSP number 18834

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14

16

18

20

22

24

26

28

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COCA-COLA HLC (U$)

COCA-COLA HLC (U$)

Coca-Cola Hellenic

Source: Datastream

+46% over past year

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RE·CM is a licensed Financial Services Provider, FSP number 18834

2

3

4

5

6

7

8

9

10 HELLENIC EXCHANGES (U$)

HELLENIC EXCHANGES (U$)

Hellenic Exchanges

Source: Datastream

+72% over past year

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Myth: This time it’s different

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Long-term corporate profits are actually very stable

Source: GMO, Standard & Poor’s, Federal Reserver 54

RE·CM is a licensed Financial Services Provider, FSP number 18834

0

10

20

30

40

50

60

70

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

MICROSOFT (U$)

MICROSOFT (U$)

Myth: good companies are always good investments

Source: Datastream 55

-63%

RE·CM is a licensed Financial Services Provider, FSP number 18834

Myth: Good stories make good investments

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“10 Stocks to Last the Decade, A Buy-and-Forget Portfolio” Fortune Magazine August 2000

1. Nokia

2. Nortel Networks 3. Enron 4. Oracle 5. Broadcom

6. Viacom 7. Univision 8. Charles Schwab 9. Morgan Stanley 10. Genentech

Average Return from August 2000 to November 2011 = -55%!

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Source: Time Magazine Archives

The next big story….

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RE·CM is a licensed Financial Services Provider, FSP number 18834

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2 Year Returns Before Hiring 2 Year Returns After HiringFired Hired

Source: Amit Goyal and Sunil Wahal, “The Selection and Termination of Investment Management Firms by Plan Sponsors,” Journal of Finance 63

Myth: Performance is a good tool for selecting skill

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Ann

ual R

etur

n %

RE·CM is a licensed Financial Services Provider, FSP number 18834

Source: Mauboussin, Morningstar Inc. – data through 12/31/2006

Myth: more activity = better results

0

2

4

6

8

10

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3 Year Return 5 Year Return 10 Year Return 15 Year Return

Portfolio Turnover vs Long Term Performance

Less than 20% 20-50% 50-100% More than 100%

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RE·CM is a licensed Financial Services Provider, FSP number 18834

Conclusions

Macro-economic forecasts are interesting but irrelevant Focus on the price you pay, it is the only thing that counts A good story will probably lead to a bad outcome Watch out for reversion to the mean Focus more on the process than performance Invest with an appropriate time horizon Stick with those you trust

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RE·CM is a licensed Financial Services Provider, FSP number 18834

RE·CM is a licensed Financial Services Provider, FSP number 18834

Thank You FOLLOW US ON TWITTER

@RECM_Online

RE·CM is a licensed Financial Services Provider, FSP number 18834

Regarding Capital Management (Pty) Ltd Registration No. 2004/007733/07

(“RE·CM”)

Regarding Capital Management (“RE:CM”) is a licensed Category I and Category II Financial Services Provider in terms of section 8 of the Financial Advisory and Intermediary Services Act 37, 2002 (licence number 18834). Accordingly, RE:CM is authorised to provide advisory and/or render discretionary intermediary services. There are risks associated with investments in financial products, including market, credit & currency risks. As performance of the financial markets fluctuates and is not guaranteed, the investor may not get back the full amount invested. Past performance is not necessarily an indication of future performance. All returns are rand returns, unless otherwise stated. All performance data is calculated by RE:CM unless otherwise stated. Regarding Capital Management (Pty) Ltd P O Box 45040 Claremont, 7735 South Africa Tel: (021) 657 3440 www.recm.co.za